INFORMATION ASYMMETRIES AND ADVERSE SELECTION IN THE MARKET FOR INDIVIDUAL MEDICAL EXPENSE INSURANCE

This article extends the literature on adverse selection in the medical expense insurance market. Empirical tests are conducted to determine whether low risk individuals purchase less complete individual (nongroup) medical expense insurance than high risk individuals whose risk levels are unobservable by the insurer. The study also investigates whether a separating or pooling equilibrium characterizes the individual medical insurance market and whether policy cross-subsidization from low to high risks occurs. Findings are consistent with the presence of adverse selection in the individual medical expense insurance market, where low and high risks purchase a pooling insurance policy and low risks subsidize the insurance purchase of high risk insureds.